Conflict Minerals Law, Supply Chain Due Diligence and Impact on Metal Buying Organizations – Part Three

In part of our continuing coverage of rare earth metals and related minor metals, MetalMiner is pleased to welcome Mr. Lawrence Heim, Director of The Elm Consulting Group International, LLC, an independent environmental, health, and safety consulting practice, as a guest contributor. According to their website, Elm was engaged by a leading US-based electronics manufacturing industry association to conduct the first independent third-party Conflict Minerals supply chain traceability audits, supporting the association’s “Conflict-Free Smelter designation for tantalum.

Additional proposed elements of the Conflict Minerals law include:

Due diligence process not prescribed. Neither the law nor the SEC’s proposal specifies the requirements for the scope or execution of a due diligence process for the Conflict Minerals Report. Instead, the SEC’s opinion is that it would be inappropriate for them to prescribe any specific guidance on the due diligence efforts. This allows companies/industries to develop a framework reflecting their own unique circumstances, products and supply chain. However, the scope of the effort and the information relied upon must be specifically described in the Report.

Applicability to scrap. The proposal establishes a separate standard for scrap materials. The SEC stated that if companies “obtain conflict minerals from a recycled or scrap source, they may consider those conflict minerals to be DRC conflict free. However, the preamble provides confusing if not conflicting language on this point.

Companies claiming the use of scrap/recycled material “would be required to disclose in their annual report, under the ËœConflict Minerals Disclosure’ heading, that their conflict minerals were obtained from recycled or scrap sources and that they furnished a Conflict Minerals Report regarding those recycled or scrap minerals. Based on this statement, a full third-party Conflict Minerals Report is required for scrap that is deemed DRC conflict-free.

The SEC does not plan to define what is recycled or scrap material. Companies are left to establish their own definition, with supporting explanations and associate due diligence efforts to be provided in the Conflict Minerals Report for the scrap/recycled material. In addition to creating ambiguity for auditors, this will likely result in companies defining “scrap one way for purposes of the SEC, and another way under EPA regulations. See 40 CFR 261.2(c).

The actual regulations are less ambiguous, stating clearly that Forms 20-F, 40-F and 10-K must contain a Conflict Minerals Report for scrap/recycled conflict mineral materials.

Number of companies affected. Two groups of companies will be directly impacted by the Conflict Minerals Law: companies that are directly regulated by the SEC, and companies that are not SEC-regulated, but are suppliers to impacted companies. For the first category, the SEC estimated that 1,199 companies will require a full Conflict Minerals Report. The methodology for determining this number is worthy of mention. The SEC began by finding the amount of tantalum produced by the DRC in comparison to global production (15% – 20%). The Commission selected the higher figure of 20% and multiplied that by the total number of affected issuers, which they stated is 6,000. (75 Fed. Reg. 80966.)Ã‚Â Clearly, this methodology does not consider many additional factors and the actual number of companies that will require the full audit is certain to be higher. For the second category the suppliers no estimate has been made.Ã‚Â But if one anticipates 10 suppliers (we have data indicating that the number of suppliers ranges from one to well over 100 for a single directly-regulated company; an average of 10 suppliers may be conservative, especially given the wide range of conflict mineral-containing products) for each company directly regulated, the number of additional companies impacted would be 12,000.

The next guest post will review the proposed requirements in comparison to three of the first-ever Conflict Minerals supply chain traceability audits, conducted from AugustNovember 2010 by independent third-party professional auditors.

MetalMiner and its sister site, Spend Matters, along with Nucor, will host a live simulcast, International Trade Breaking Point on March 1, 2011. If your company sources products from overseas, you will not want to miss this half-day event: